I had never heard of mortgage assumption, but read about this cool new start-up in Bloomberg:
Mortgage assumption startup
Just conceptually it is an obvious trade:
I own a house with a $400,000 mortgage with a 3% interest rate, and I want to sell it.
You would like to buy my house for $500,000, putting 20% down and borrowing $400,000.
But interest rates have gone up a lot, and if you got a $400,000 mortgage now, the interest rate would be 7%.
You can’t afford that, so you don’t borrow $400,000, so you don’t buy my house.
What if you could give me $100,000, move into the house, and take over my mortgage, making the 3% payments until it is paid off? Then we are both better off.
Broadly speaking you could imagine two ways to do this:
We could call up my mortgage lender and say “hey, everything about this mortgage is gonna stay the same — same amount ($400,000),[2] same term (30 years or whatever), same rate (3%), same collateral (my house), except there’ll be a different borrower (you, not me). Are you cool with that?” And then the lender says “yes,” either out of the goodness of its heart or because we pay it a little fee or because the original terms of the mortgage specifically allowed me to let someone else take over the mortgage.
Magic? Like, we do some sleight of hand where we don’t call up my lender to get its approval, but we structure a transaction between ourselves that achieves this result. You give me $100,000, you move into the house, you send the mortgage checks to me, I forward them to my bank, we enter into some sort of blood oath that makes me not have to worry about your credit risk, I don’t know.
The first option is called “assuming” the mortgage. Generally speaking if you call up a bank asking them to let you assume a 3% mortgage, they will say no, because that is a money-losing trade for them. The lender would much rather have me sell the house for $500,000 to a new buyer who does not assume the mortgage, get its $400,000 below-market mortgage paid back, and then issue a new $400,000 mortgage to the buyer at market rates (7%).[3]
But, in the US, some mortgages are, by their terms, assumable: The bank doesn’t have to like it, but it can’t say no. In particular, the Wall Street Journal reports:
That Journal article is about a new company called Roam that is launching to address that problem, mostly by telling people with assumable mortgages that they have assumable mortgages:
The “paperwork and other bureaucratic hoops” are driven not only by old-fashioned banking processes but also by the fact we discussed above, that a bank doesn’t really want to keep a 3% mortgage outstanding if it doesn’t have to: